The Budget Deficit Does Not Require Foreign Financing

29th November 2018 Off By binary
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In the middle of a useful article on the trade deficit the Post told readers:

“Last year’s $1.5 trillion Republican cut in corporate and personal income taxes, along with the decision to eliminate congressional limits on government spending, has revved up the economy and created nearly $1 trillion budget deficits for the coming years that require financing from abroad.”

This is not exactly true.

When the government borrows more money, it pushes upward pressure on interest rates, other things equal. At higher interest rates foreign investors may choose to buy more U.S. government bonds, but it is also possible that domestic investors will opt to buy more U.S. bonds, as opposed to other assets. This is the reason that interest rates on mortgages and corporate debt have risen in the last year. Investors who might have otherwise held these assets are instead choosing to buy government bonds.

If no foreigners opted to buy the newly issued debt, interest rates would rise to the point where enough U.S. investors were willing to hold the debt. The fact that foreigners are willing to buy U.S. bonds means that interest rates would not rise as much as would otherwise be the case (holding the response of the Fed constant), but the U.S. does not need foreigners to buy our debt.




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